EUR: Improving growth & inflation outlook offers only limited support – MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the euro is deriving only limited support from further evidence of positive economic developments in the euro-zone.

Key Quotes

“Economic data releases over the last month or so have surprised strongly to the upside in the euro-zone as the recovery appears to have strengthened. The release yesterday of the latest composite PMI survey provided a further encouraging signal revealing that business confidence in December increased to its highest level since May 2011. It prompted Markit to state that their surveys were consistent with the economy expanding by 0.4% in Q4 with risks tilted to the upside.”

“The weak euro was cited as boosting goods exports and encouraging demand for services exports such as tourism. The weak euro is also helping to ease downside risks to the inflation outlook in the euro-zone. The latest CPI report revealed that the annual rate of headline inflation accelerated sharply to 1.1% in December moving back above the core rate for the first time since 2013 driven mainly by higher commodity prices. Core inflation remains more subdued increasing by an annual rate of 0.9% in December. It is expected to pick up only gradually in the year supporting the ECB’s recent decision to extend QE until the end of the year. The continuation of the ECB’s loose monetary policy stance should remain a weight on the euro for most of this year.”